More than ten years ago, Linda Butler (2003a) published a well-cited article claiming that the Australian science policy in the early 1990s made a mistake by introducing output based funding. According to Butler, the policy stimulated researchers to publish more but at the same time less good papers, resulting in lower total impact of Australian research compared to other countries. We redo and extend the analysis using longer time series, and show that Butlers’ main conclusions are not correct. We conclude in this paper (i) that the currently available data reject Butler's claim that “journal publication productivity has increased significantly… but its impact has declined”, and (ii) that it is hard to find such evidence also with a reconstruction of her data. On the contrary, after implementing evaluation systems and performance based funding, Australia not only improved its share of research output but also increased research quality, implying that total impact was greatly increased. Our findings show that if output based research funding has an effect on research quality, it is positive and not negative. This finding has implications for the discussions about research evaluation and about assumed perverse effects of incentives, as in those debates the Australian case plays a major role.