what does levelling do?

[Recurvatum]

Combat gets SP for maxing out spells, is levelling just for stat gain only really?

[Xengre]

Stat gain, yes, but equipment and stat boosting consumables play a bigger role in this. Leveling is mainly for HP gains and most notably from what I can tell scaling vs enemies (I'm not 100% on this as I haven't tested in detail, but it at least appears like so and is a common application of how many games handle level scaling. If scaling vs enemies is, indeed, the case this can mean level is a modifier for how much damage you do and take from an enemy to make enemies that are noticeably higher level significantly more powerful or more reasonable to fight depending on how steep the level difference is/or not despite actual stats not changing dramatically. (Example: the level 43 enemy gigantic found near start of game does like 19k dmg early on, but your stats aren't going to increase to such ballooned values but rather dmg taken scales down significantly as you approach its level).

[Yennime]

Leveling is very important in this game since you basically deal no damage to very high level enemies if you're severely underleveled. Also it works counterwise as well, the higher level you are you deal more damage to lower leveled enemies conversely you don't get or get some amount of exp, but you still get item drops.