This is a rush transcript from "Hannity," July 14, 2010. This copy may not be in its final form and may be updated.

SEAN HANNITY, HOST: So with three months remaining on the budget calendar, the Obama administration has announced that the federal deficit has reached the $1 trillion mark for the second straight year. And don't expect things to change in 2011. According to the Treasury Department, the deficit will remain $1 trillion next year, as well.

Now, fiscal discipline may be a thing of the past in Washington, but in the neighboring commonwealth of Virginia, Governor Bob McDonnell is ushering in a new era. Six months ago when he was sworn into office, the commonwealth faced a $1.8 billion deficit. But under his leadership, he's turned that deficient night a $220 million surface - surplus.

And tonight here to tell us exactly how he's able to do it - and by the way, I hope President Obama is watching - and joining me now from Richmond, Virginia, is Governor Bob McDonnell.

Governor, good to see you, welcome back.

GOV. BOB MCDONNELL, R-VA.: Hey, Sean. Nice to be back on with you. Thanks.

HANNITY: I - I got some conflicting information, because I read your piece in The Hill. And you said you actually - that your administration had an unprecedented $4.2 billion deficit. Was it 1.8 or was it 4.2 that you inherited?

MCDONNELL: It was 1.8 just for the end of this current budget ending June 30 of 2010 for the last - and then going forward over the next two years, the '11 and '12 budget, we faced a $4.2 billion deficit.

And Sean, we were able to work together and eliminate that deficit by cutting $4.2 billion in spending. No increase in taxes. And so we've got the new budget in place. But the good news we announced today was that $1.8 billion deficit that we faced coming into office six months ago has now resulted in a year- end close of at least $220 million in surplus. And we did it by cutting spending, reducing our budget estimates to a realistic amount, and making sure that we're doing what American families and businesses do, and that is don't spend more than you take in. It's a pretty simple formula.

HANNITY: This is what - this is what drives me crazy. I mean, if I was in trouble financially, the first thing I would do would be to cut back on spending. A lot of people at home - and by the way, I've had tough economic times in my life. And that's - look, there was a time in my life I was driving $250 cars, and I couldn't afford to go to a hamburger place, because I just - I just didn't have the money at that point in my life.

And I know many people are struggling right now. That's what most American families will do.

Here's what I found interesting in what - in the model that you put together, the paradigm you put together. You actually went back to spending levels from four years ago.


HANNITY: Your budget is now at the 2006 level. Is that something, realistically, that can be done on a federal level?

MCDONNELL: Well, it was a matter of absolute necessity, Sean. You don't tax your way to prosperity. You live within your means. So we felt it was good to reduce that.

Now, there were some tough things that we - that we cut in education, in higher education, in health services. But we felt that that's what we needed to do.

The rate of growth of spending, Sean, at every level of government is unsustainable. We've doubled our budget in the last 12 years in Virginia. You've just quoted some statistics showing at the federal level we've got a $4 trillion national debt. Sean, that's unsustainable. It's over 100 grand per American family. We cannot continue on this road of becoming a greater debtor nation.

So the only way we've got to approach this is promote economic development, strengthen the free enterprise system, keep taxes and regulation low, and things turn into surpluses. That's what we've been able to do.

HANNITY: I've got to be honest. It seems very - just like common sense to me. And - and I don't think you're really tooting your own horn here, except to say, "Hey, this is a success story."

The rest of the country, we're facing trillion-dollar deficits as far as the eye can see. We've still got three or four months in this fiscal year; already a trillion dollars in the hole; 1.4 trillion last year. That's three trillion in two Obama years that we've accumulated for debt for our kids and grandkids.

And I don't hear anybody talking about reducing spending. Why don't we even hear that discussion in Washington?

MCDONNELL: You're hearing it a lot from Republican governors around the country. My friend Chris Christie in New Jersey is doing a great job, doing the significant cuts that need to be done to get his budget in safe.

Republican candidates for governor around the country are talking about it.

But in Congress, particularly with the Democratic leadership, it's just more spending that's irresponsible and mortgaging our kids' future.

We were at the Republican - the National Governors' Association this weekend, Sean. Senator Alan Simpson said - said this. He said, "The pig is dead. There's no more bacon to bring home." And he's absolutely right. You've got to live within your means like a family in business. And if governments do and promote economic development of free enterprise, you're going to have prosperity.

And, you know, we have a long way to go. We've got all these unfunded mandates from the federal government, from health care and other things coming down the pike that we're still going to have to worry about. But in the short run, the good news is these fiscal principles produce surpluses.

HANNITY: You know, it seems to me that - that this is very doable here and that this seems to me to be the platform that the Republicans ought to be, you know, screaming from the top of the mountain going into this election year.

Would you like to see Republicans put their promise to balance a budget on paper? And do you think they can put forward a balanced budget in spite of these unfunded mandates and the lack of discretionary spending that they have to cut?

MCDONNELL: I really do. We're fortunate in Virginia our founders had the vision of putting a balanced budget requirement into our constitution. And the states that have that or require that by executive fiat are doing very well.

I think the Republican leaders in Congress, when they take the House back over, I think that's what you're going to see John Boehner and Eric Cantor do, because they realize we can't sustain this level of spending.

HANNITY: I spoke at your convention. You made that promise that day, and obviously, it's proven to bring quick dividends. So Governor, continued success. I hope they're listening on the national level.

MCDONNELL: All right, Sean. Thanks. Great to be with you.

HANNITY: I appreciate it.

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