First, this not only requires compressing the binaries. It would also require to include relocation information in the (ROM) based compressed image. It also means that the data needs to be decompressed to some place since it could no longer run from ROM (as it does now).
Yes, decompressing (the whole thing, or close to it, in one big block) to somewhere. That's what I was hinting at when I mentioned the practice of relocating ROM to fastram via the MMU.
I don't know how feasible it is to run everything from a nonstandard memory region (ie. not using the MMU to remap it to the ROM area). I'm guessing your suggestion of relocs is based on the fact that fastRAM uses different addresses depending on the hardware setup? How far along in the boot process do you have to get before accelerator/expansion card RAM configuration is known?
Obviously, lack of RAM and/or MMU (and maybe decompression time) would preclude this type of build from being used with low-end machines. But users of low-end setups probably have a shorter wishlist of functionality they want to have added into kickstart. I don't know if you already have separate variants of the ROM for different machines, or one for ECS and one for AGA or what...