It isn't. Not even close. It's just the Vista kernel with incremental changes, just like Vista was just the XP kernel. If one wanted to be silly one could claim that Windows 7 is just service pack 32 of the original NT OS/2. Rewriting things just for the sake of rewriting them tends to be pointless, and will almost always get you a much buggier product. You can't replicate two decades of work in a couple of years.
Windows 7 isn't much smaller than Vista. Even when the OS itself is only 7GB, you still have to make room for things like system restore, shadow copy, backups, page files, and hibernation. On a system with 4GB RAM these will easily exceed 10GB on their own, and grow further with time.
In Windows it's actually the things running on top of the kernel that are getting old and are in desperate need of replacing.
If you take the graphics API for instance (which actually is part of the kernel, but never mind), it hails from Windows 1.0 and is probably in the top three list of things that need replacing in Windows. What you think of as "the kernel" doesn't even make it into the top 50 list.