For your original video in standard def, let's say 720x480 16:9 flag, then you only have a specific amount of picture information to work with. Also, the video IS ONLY 720x480, and is stretched by the 16:9 flag. So less space is taken up than if you actually had, say 848x480 video with square pixels, because the 720 is being stretched out upon playback.
If you've blown up your video to a rez like this, already you're taking more space up with the same information. Now if you blew that up to like 720p, you're just stretching the existing pixels over that whole area, working with the same amount of information over almost twice the space. Sure you can sharpen/denoise/filter a bit for a decent result, but it's still a crappy uprez, still makes for a larger file size. And unless you're covering the hell out of the thing with effects, it's still really noticable.
I guess the only reason I'd have for doing something like this is if I wanted omgHD, so I could add effects or stuff to it that ARE at true HD resolution, or so I could maybe use pieces of unstretched video in like a collage inside this size frame...there are some reasons I guess, but meh :/
If you are creating original source footage yourself (animation or hand drawn etc), then there's no reason why you shouldn't do it at 1080p if your machine can handle it. That way, you release an SD version, but you have a nice pretty HD version sitting around for when this kindof thing becomes more mainstream. There's no way I'd NOT create original stuff in HD, because if I'm gonna put that much time and effort into the thing I'm creating, you bet I want to take advantage of that.
(ponders rendering 3d stuff in 4k

)