Using a dataset of all publicly-available local government procurement contracts in China, we study the social costs of local government debt. Highly indebted local governments delay procurement payments to their contractors, who in turn delay salary payment to their employees. This trickle-down effect causes a deterioration in firm fundamentals and sparks employee protests. Our findings are (1) are not driven by local economic conditions, endogenous government indebtedness, or self-selection into becoming government suppliers, (2) do not apply to government-linked firms, and (3) are larger for firms in areas with weaker labor and property rights.