McDonough was born in Ottawa, Ontario, Canada. Her father, Lloyd Shaw, was a wealthy brick baron, but was committed to progressive politics. He served as a financial researcher for the NDP's predecessor, the Cooperative Commonwealth Federation and an early financial backer of the NDP when it formed in 1961.
McDonough attended Dalhousie University in Halifax, Nova Scotia, Canada, earning a Bachelor of Arts in 1965 and a Masters of Social Work in 1967. She worked in the United States for two years, and then returned to Nova Scotia to work for the Department of Social Services.
After two unsuccessful campaigns for federal politics in 1979 and 1980, she became the leader of the provincial NDP in Nova Scotia, winning a seat in the Nova Scotia legislature in 1981. Although she spent the next three years as the only New Democrat and the only woman in the provincial Legislature, she was widely regarded as a tough, passionate and courageous advocate for NDP issues. She was instrumental in fighting for and winning the first ban on extra billing in Canada, worker health and safety improvements, human rights protections and pay equity
In 1994, she stepped down as leader of the Nova Scotia NDP to contest the federal NDP leadership when Audrey McLaughlin announced her retirement. In the leadership race the following year, McDonough was widely viewed as an also-ran behind the leading contenders, Svend Robinson and Lorne Nystrom, but at the convention on October 14, 1995, she placed second on the first ballot, ahead of Nystrom. Although Robinson had placed first on that ballot, he felt that most of Nystrom's supporters would go to McDonough on the second ballot, giving her the victory. Thus, he conceded to McDonough before the ballot was held.
McDonough inherited a party which had won just nine seats in the 1993 general election, but in 1997, her first election as leader, she managed to win 21 seats for the party, including a historic breakthrough in the Atlantic provinces.
During the next few years, McDonough's leadership of the party was controversial. She was widely seen within the NDP as trying to pull the party toward the centre of the political spectrum, in the third way mode of Tony Blair. Union leaders were lukewarm in their support, often threatening to break away from the NDP. Many activists within the party began a process called the New Politics Initiative, or NPI, which tried to build more connections between the NDP and activist groups who were currently outside the parliamentary process. Although the NPI proposal was voted down when it was presented at a party policy conference, the tensions within the party hurt the party's popular support.
As well, the Canadian Alliance under its new leader Stockwell Day presented a further challenge. Fearful of the prospect of a Canadian Alliance government, many NDP supporters moved to the Liberals. Two NDP MPs, fearful of their re-election prospects, joined other party caucuses, bringing the NDP to 19 seats. As well, in the general election of 2000, the NDP was held to just 13 seats and its poorest percentage of the popular vote in years. However, they gained one more seat in a byelection in 2002.
McDonough announced her retirement as NDP leader in 2002. At the leadership convention on January 25, 2003, she was succeeded by Jack Layton.