Based on the data of listed companies from 2010 to 2022, this paper discusses the effect and mechanism of local government debt risk on the financial risk of the real economy. It is found that the rising debt risk of local governments leads to the rising financial risk of the real economy in the region. The mechanism research shows that the local government debt risk mainly aggravates the financial risk of the real economy by worsening the business environment of enterprises and increasing the difficulty of financing. Heterogeneity analysis shows that the financial risks of enterprises and state-owned enterprises in low-market regions are more negatively affected by local government debt, and the implicit debt of local governments has a more magnifying effect on the risks of the real economy than full-scale debt. Further research shows that expenditure competition has deepened the negative impact of government debt risk on the real economy, while tax competition has alleviated the spillover effect of government debt risk on the real economy. The research conclusion provides a reference for solving the risks between the government and the real economy, promoting the orderly competition of local governments and optimizing the relationship between government and enterprises.