Disc 2 is... yeah.
I abandoned my first attempt to play through the game because I couldn't take anymore of it. Too much was happening too fast with too little explanation and immersion. There was a reason why, years later, I could remember much of Disc 1, but so little of the game after the reins are taken from you. I was talking to my bro the other day, and he mentioned that when you're in D Block, "you feel like a prisoner." As annoying as the D Block segment is, I couldn't disagree. Playing through that part of the game made you feel trapped in a way that just having it narrated in summary to you wouldn't have achieved.
So, when Fei or whomever talks on Disc 2 about massive decisive battles so decisive that NO ELLY YOU CAN'T COME ALSO I'M A SEXIST JERK, and we the players don't get to be a part of that, it is difficult to appreciate the stakes. Things also seemed to happen with surreal abruptness and it was rather difficult to string events together. For example, I am certain that I read every word, but I was completely lost as to why Elly feeding her blood to a mutant was so significant as to be the first anime cut scene in forever. (Seriously, these Sufal things were never mentioned before then, and the entirety of the significance they carried after was to be common mobs once you got map access back.) I was also so hopelessly lost as to why this "Deus" thing that the game had been building up to from the start ended up being this wacky rotting skull-faced thing that we're suddenly thrown into a boss battle with, where it effectively destroys itself and then disintegrates off-screen. It was so eerily nonsensical that I think I just stopped playing after the Raziel scene. I DON'T UNDERSTAND WHY ANYTHING IS HAPPENING ANYMORE, SCREW THIS GAME! (Frankly, I still don't understand the Mahanon Deus sequence at all, but... another thread.) I had been able to tolerate all the Citan, Cain, and Gazel Ministry nonsense of Disc 1, but Disc 2... was just too much. Or too little, as the case may be.
Although I don't count on it ever happening, I would very much like to see a more... fleshed-out Disc 2, where the appearance of a menu prompt does not feel like a miracle from on high. I love stories in my RPGs, but, you know, one of the strengths of a video game, rather than a book or movie, is being able to actively explore an environment and collect information at your own pace. Dungeons can be much more than padding -- just look at Karellan's Lab; imagine being able to explore Mahanon! -- and towns can be a great place to decompress and absorb the story. Not to mention, there was a bit more to our party than Fei and Elly, and Disc 2 kind of forgot about them!
(In a hypothetical Xenogears remake, can Chu-chu be replaced with Margie? Pleeeeeeease?)
On another note, according to the rather impressive History of Xenogears & Xenosaga, there were never any budget cuts. The budget was small to begin with (Xenogears was an unproven property, after all) and Square actually allocated more funding than it originally planned so that more anime sequences could be produced. The state of disc 2 appears to be a result of overambition and schedule conflicts.