Oh goodness, that sounds like a horrible situation. My heart goes out to you My first thought was to first and foremost call the breeder. Your breeder should have written a contract that ensured partial or complete responsibility over any congenital defects. If s/he doesn't take any action (i.e. speutering your Lab's parents or contacting the littermates or even just paying part of the bill), I would urge you to take the initiative and make sure your Lab's littermates know that health risks may lay ahead. I would even go so far as to encourage the breeder to end the bloodline if these congenital defects are common in your dog's pedigree.

Secondly, it seems as if you have weighed the pros and cons rather well. The only thing I would suggest is to have a detailed conversation with your veterinarian and possibly getting a second opinion (by a nerve specialist, preferably) about the quality of life your Lab will lead and the chances of success with the operation and recovery. Any operation dealing with nerves is a tricky business and recovery can always go awry. Borzoimom raised a good point. In the long run, money is but a superficial obstacle to maintaining your dog's faithful love and loyalty.

Have you thought about aqua therapy? I've never had much experience with aqua therapy, but it might be a less strenuous option for your Lab. Besides, your vet said no strenuous play with similar large dogs. That doesn't mean your Lab can't have a couple gentle play sessions with smaller, calmer dogs. I'm sorry I couldn't give you a clean cut answer but I hope you can make the right decision for your family and your beloved companion.