I thought I had this exact problem, and all the relevant issues I could find in the VS Code GitHub project seemed to have been fixed (see https://github.com/Microsoft/vscode/issues/19029, https://github.com/Microsoft/vscode/issues/6502).
In my case, because I had previously opened some of the files in those excluded directories, they still showed up in "Go To File" in the "Recently Opened" section, which made me think the exclusion feature wasn't working.
Turns out I just had to manually remove those items from history to keep them from showing up. Open the Command Palette, run Remove from History
, and then select the a file to remove. You may need to do this for each file you'd previously opened from an "excluded" dir, but after this is done, they shouldn't show up anymore in the "Go to File" menu.
Hope this helps!