The accumulation of local government debt risk has become the biggest obstacle to local fiscal sustainability. This paper analyzes the effects of the hard budget constraint on local government debt on local fiscal sustainability by using the double difference method in a quasi-natural experiment with two stages of reform: “opening the front door” and “closing the back door” of local government debt management after the implementation of the new Budget Law. The study finds that: first, both phases of the reform have a significant positive impact on local fiscal sustainability. Second, the mechanism of action analysis reveals that the “opening the front door” and “closing the back door” phases of reform play an effective role in local fiscal sustainability through fiscal consolidation and debt size control. Finally, the positive effect of debt budget constraint on local fiscal sustainability is more pronounced in places with weaker incentives for local governments to raise debt and higher fiscal supervision. The findings provide policy recommendations for promoting debt budget constraint and preventing and resolving local government debt risks to enhance local fiscal sustainability.