The funding does not cover the whole cost, as is admitted in the DPA letter linked by Qwerty2:
The present level of funding for LARS is insufficient to cover the cost of a stand-alone service but it is a useful form of supplementary income for ATSUs using their existing infrastructure, equipment and manpower. It effectively cements their commitment.
The top rate in that letter (dated 2007) is £85.5k for up to 65 hrs of service. That would barely cover the salary of one controller plus the associated costs of his training, standardisation, leave cover, etc, let alone the 3-4 controllers the unit would actually have to employ to provide that up-to-65 hours of service. (I have not done the establishment sums, just working on orders of magnitude).
Others here have rightly said that perceived requirement has reduced in line with traffic levels operating in lower airspace. The extrapolation of this trend added to the expense to the unit can only mean the number of units providing LARS will reduce. The airport authority's thought process will be along the lines of: "less GA/Mil traffic in the lower air around my airfield = less risk to my aircraft movements outside CAS = less return on my investment in the extras controllers, so let's spend the money on petitioning for more CAS around the airfield to get the protection instead". Unless the system is fully-funded, civil units will eventually stop providing LARS unless their safety management assessment in favour of providing it is irrefutable. Mil units will continue to provide it at certains units in our own interests and, with fewer Mil movements, we need to give controllers something to do.
This is just my opinion but, when times are hard, businesses trim everything they can in order to save money. UK LARS is a 'luxury' provided at a loss on a voluntary basis. We need to be very convicing with our argument to retain it or the bean-counters will get rid of it, which would be wrong for lots of reasons other than their balance sheets.