Why is my MacBook Pro HDD nearly full when I pay for 2TB iCloud?

Maybe the answer is obvious but why is my MacBook Pro nearly full when I pay for 2TB iCloud?

I have a screen capture of my Mac HDD.

171.78 GB of my Mac HDD is being used by iCloud Drive. Huh? I thought these files would be in iCloud ... not on my Mac's HDD. That should read nearly zero as the files on the HDD should be just aliases surely.

I now only have 28.06 GB free on my 500 GBHDD.

Can someone advise me on what I am doing wrong, please.