Should spells be able to progress along with you? eg. spells get larger and do more damage at higher levels/when you practice it enough.

I think that you should be able to charge spells by holding the mouse button, with higher charges achievable at higher skill levels. I don't see why a high level mage shouldn't be able to cast a small fireball.

Definitely. Don't want to use loads of magicka killing a rat, that is quite simply all there is to it.