Will subscribing to IMatch reduce storage used on my iPhone 4?

Yes, you could delete all the music you store on your iPhone. Just understand that with iTunes Match you must have an internet connection in order to access the music files. You also must provide space on the iPhone to download the tracks you wish to play from the cloud.

If you're running iOS 6.1 & subscribe to iTunes match, you can now download individual songs from the cloud...huge improvement. So yes, iTunes match is now a great way to manage the songs on your phone.

So, just to make sure I understand correctly, listening to music from the cloud will not be "streaming" but instead will be downloading again?

Yes.