The invention relates to an indoor model test device capable of simulating slurry balance shield construction and a use method thereof. The indoor model test device comprises a digging propulsion mechanism, a circulation mechanism and a slurry injection mechanism, wherein the digging propulsion mechanism comprises an electric motor, a speed reducer, a shield shell, a main shaft and a rotary pipe, the circulation mechanism comprises a circulation tank, a micro water pump, a water inlet pipe, a mud outlet pipe and a pressure regulating pipe, and the slurry injection mechanism comprises a slurry injection tank, a slurry tank, a mini compressor, a pneumatic pressure tube, a slurry injection pipe and a slurry injection head. Compared with the prior art, the indoor model test device has the advantages that a whole construction process, such as dynamic digging propulsion, pipe sheet assembly and wall back grouting, of a slurry balance shield construction machine can be simulated, more accurate and real experimental data can be provided for the design of all parameters for actual shield tunneling construction, and the safety during actual construction is guaranteed.