The hardware won't boot it. To run System 7, you have to have an old world Mac that has the Macintosh toolbox in ROM. The new ones (iMac, Blue G3 and later) have a tiny OpenFirmware ROM that loads the ROM from a file on the HD (look for the Mac OS ROM file in the System Folder of Mac OS 9). System 7 doesn't include the ROM file, and simply won't boot.
And if it would boot, it wouldn't run on the hardware. Apple software and hardware are closely tied together. the 8600/300 was the last Power Mac to run a release of System 7 (7.6.1). Beige G3s require 8.0, 1st Generation iMacs require 8.1 or 8.5. Blue G3s require 8.5 or 8.6. G4s require 9.0, 9.0.4, 9.1, or 9.2/X depending on the model.
Running System 7 might actually be SLOWER than running 9.2.2 because 9.x is optimized for G3s and better, and System 7 has a whole shitload of 68K code that would run in slower emulation mode. I don't know how much slower, but it would probably feel boggy and sluggish at times as it switches between native and emulated code.
Oh yeah, and System 7 doesn't have guard pages, improved memory protection, support for CDR, iTunes, Carbon, or HFS+. Without Carbon support, you won't be able to run about half of modern software, and without HFS+ support, you'll never get system 7 and Mac OS X on the same partition. Honestly, I don't think a Power Mac G4 can boot off a standard HFS disk.
I like your idea... if I could do it, I'd run System 7 on my iMac, but unfortunately... it won't happen on a New World Mac.