Addressing delegates at the party's annual conference in Armagh on Saturday, he stated the SDLP's core values of reconciliation, social justice and prosperity are central to rebuilding faith in politics and trust in politicians.
He said that politics has been degraded in the past year and this could not be allowed to continue.
Mr McDonnell said that the DUP and Sinn Féin are "parties of disappointment, false promise, poor government, bad politics - and no results".
Addressing controversial issues of flags, parades and dealing with the past, he said there is still much work to do.
The south Belfast representative claimed last year's decision at Belfast City Council to fly the Union flag on designated days was a "sensible compromise".
He added that the party "makes no apology for regarding the Tricolour as our national flag" and that it is "unfortunate that Unionists cannot do compromise".
Continuing, Mr McDonnell said the SDLP's view is that there must be a comprehensive approach to addressing matters of political and cultural identity, including emblems, symbols, languages and memorabilia.
The many broken promises in the programme for government show the disappointing failure of the DUP and Sinn Féin, including the failure to get to grips with a shared future, collusion issues, real power sharing and integration.
He said the SDLP's goal for the Haass talks is a comprehensive agreement on these remaining issues.
"The SDLP want the other parties to work with us to address the past on an ethical basis. This is about more than just, truth recovery, acknowledgement and accountability," he added.
"The needs of victims and survivors must have priority in this process."
The MP said uncovering the truth about killings and securing answers for victims and survivors was essential to create a healing and reconciled society.
Mr McDonnell called for truth on British state collusion, but added that it "never justified a single IRA atrocity". He appealed for anyone with information on IRA killings to come forward.
On parades, he said in the absence of dialogue and local agreement, an independent body, ie the Parades Commission, should be responsible for making determinations.
He added that the British and Irish governments must be the co-guarantors for any agreement that emerges from the Haass talks.
We in the SDLP believe that the North requires a formal prosperity process, pursued with the same ambition and determination as the peace process.
Mr McDonnell said the SDLP is being "vigorously renewed and re-energised" and is ready for the electoral battle next May.
He emphasised that improving the region's prosperity is one of the party's main missions.
"We need a prosperity process that will underpin the peace process and lay the foundations to create the well-paid jobs that would banish the spectre of youth unemployment and emigration that has brought so much heartbreak to our communities," he said.
"A prosperity process that would in time, crucially, permit the North to stand on its own feet, pay its own way and play its rightful role in the development of a buoyant all-island economy."
He called for immediate economic changes and said the DUP and Sinn Féin must see "beyond short term party political self-interest".
Mr McDonnell also told the conference the Housing Executive is one of the SDLP's greatest achievements and that they would "fight every inch of the way to secure its independence".
Welfare cuts, reducing corporation tax and health issues such as waiting lists and potential care home closures were also on the leader's agenda.
Mr McDonnell said: "We will never abdicate our responsibility to go the extra mile, to stretch ourselves to work with others and to rebuild your faith in good politics that delivers opportunities for all our people."
Among those who addressed the party conference was Tanaiste Eamon Gilmore, who urged politicians to make progress in north-south relations and in the Haass talks.
"One-dimensional politics does not fit with the concept of the Good Friday Agreement, which requires all of us, the SDLP, the government and others to all work together," he said.
"We cannot risk letting the germ of hope, opportunity and ambition which has taken hold in so many communities be left to go to seed."
Mr Gilmore's speech also focused on boosting the economy including tackling high levels of youth unemployment and better cross-border cooperation.
He said people needed to realise the potential of the GFA and all its parts, including a bill of rights, a civic forum, greater participation of women in political life, integrated education and shared housing.