I have wood paneling on furring strips on cinderblock in my basement. For a
contractor to redo it with drywall, he needs to do it to code and build out
almost 2 inches to bring it up to R-13.

I know 1.5 inches is just that, but how much does this perceptibly make a
room smaller? I tend to think it is worth it to have the work done, but
worry a little about losing the space, since it is at a premium.