As we have seen, the military was short on equipment and manpower.
The military was only 'short' of these things if you believe it should be used for imperialism. For defense and deterrent purposes it was oversized.
3% is an excessive amount. And what do you mean by a 'world class fighting force'? It was more powerful than any other, which is plenty. The only shortcomings are in 'projection of power', which is all about global domination and imperialism.
Yes, historically the parasitic military industrial complex sucked away even more of the nation's production.