Higher compression (smaller files) can be gained by using an MJPEG codec. The PICVideo one is good but not free, there is also a free MJPEG codec included in the ffvfv project but I've not used it.
Or you could try a DV codec; the one from Panasonic is free, and would probably give smaller files than MJPEG but you would have the chroma subsampling effects on NTSC captures.
However, if you are really struggling with HDD space, and can live with the quality limitations of capturing direct to MPEG-2, then it shouldn't be that bad. It's worth noting that DVD recorders use this format.
If there is a severe drop in quality between your MPEG-2 raw capture, and the final MPEG-2 encoded output, then there is something wrong. But more details are required to diagnose the problem.