Digital economy plays an important role in fostering new development dynamic and supporting high-quality development. Since the fiscal pressures of Chinese local governments have been increasing, it is crucial to explore the impact of digital economy on local fiscal sustainability. This paper uses panel data of 225 prefecture-level cities in China from 2015 to 2020, and finds that cities with higher level of digital economy development will have stronger local fiscal sustainability. Mechanism analysis shows that digital economy enhances local fiscal sustainability by raising fiscal revenue and increase fiscal expenditure efficiency. The important role of digital economy in improving fiscal sustainability is further demonstrated in the fact that digital economy has stronger mitigation effect on fiscal risks of local governments which rely more on land finance and are greatly affected by tax cuts and fee reduction policy. Higher fiscal transparency and more financial support can improve the effect of digital economy on fiscal sustainability. This study verifies the key role of digital economy in maintaining stable growth and preventing risks, and is meaningful for promoting Digital China initiative, resolving local financial risks and advancing sustainable development of economy.