The size was shrunk dramatically by a more efficient codebase.
The latest update for Microsoft Flight Simulator reduces the game's size in half. But don't worry, the actual playable world remains the same, it is the initial full download of the title that has been reduced. The base game is now only 83GB instead of +170GB. This is a huge improvement for the game itself and for players.
Microsoft attributes this huge improvement to "some optimization for the initial full download," but the exact changes are still unknown. One possibility is that the game is now downloading more content on the fly – in which case the net difference for players would be zero. Besides that, the 126.96.36.199 update introduces some new gameplay features. The navigation is now easier, and the planes are more realistic than they have ever been.
Unfortunately, there are also some problems related to the update. Community folder packages that haven't been updated could hurt the game's stability and load times, and Microsoft recommends moving them to another folder if that's the case.