The accumulation of local government debt is not only a simple risk problem, but also a systemic proposition running through “finance, economy and finance”. Based on the panel data of listed A share manufacturing companies from 2010 to 2020, we used basic regression model and intermediary effect model to empirically test the impact and mechanism of local government debt on manufacturing innovation. The results showed that: there is an “inverted U shape” relationship between local government debt and manufacturing innovation. Within the threshold, rising local government debt can spur innovation in manufacturing. Once the threshold is exceeded, it will crowd out the credit resources of the manufacturing industry and inhibit its innovation. Bank credit allocation has a partial mediating effect on the impact of local government debt on manufacturing innovation. Further analysis shows that there are regional heterogeneity and ownership heterogeneity in the impact of local government debt on manufacturing innovation. The eastern region has a higher threshold, followed by the central region, and the western region has the lowest threshold, which has a strong crowding out effect on non state owned enterprises. In the future, the authority to examine and approve local government debt should be moved up, and an effective investment efficiency evaluation mechanism should be established.