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CNBC Exclusive: CNBC Transcript: Senator Mitch McConnell Speaks with CNBC's "The Kudlow Report" on Wednesday, October 2

WHEN: Wednesday, October 2nd

WHERE: CNBC's "The Kudlow Report"

Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Senator Mitch McConnell on CNBC's "The Kudlow Report" tonight, Wednesday, October 2nd. Following is a link to the video on CNBC.com: http://video.cnbc.com/gallery/?video=3000204107.

All references must be sourced to CNBC.

LARRY KUDLOW: Welcome back live to CNBC World Headquarters. This is The Kudlow Report. All right, here's what's happening right now. Congressional leaders just left the White House after meeting with President Obama to discuss the current government shutdown and the upcoming debt ceiling budget fight.

Joining us now exclusively, and fresh from inside that Oval Office meeting, we welcome back Senate Republican Leader Mitch McConnell. Senator, as always, sir-- thank you for coming back to The Cover Report and let me just get right to it. You were in this key meeting. What did you take away from this meeting? And do you think the president wants to play an important negotiating role in ending the shutdown?

SEN. MITCH MCCONNELL: Well, Larry, I would say this about the meeting. It was cordial but unproductive. The president continues to maintain privately the position he's had publicly, which is he doesn't want to negotiate about the continuing resolution to operate the government or over raising the debt ceiling.

Let's focus on the debt ceiling for a minute. America's not going to default on its debts. But going back to the 1950s, any President's request of us to raise the debt ceiling has frequently-- brought along with it a-- discussion about what to do about the debt. And as-- as you've pointed out to your viewers frequently, we now have a gross debt the size of our economy. That makes us look a lot like a Western European country.

And we think-- there ought to be some conditions-- that would be good for the country attached-- to the raising of the debt ceiling. And at least the President's position, at least so far, is that-- he wants it clean, no matter what. I think that's an unacceptable position for Senate and House Republicans and should be an unacceptable position for the American people.

LARRY KUDLOW: I don't see how this thing gets-- fixed up, sir. Because Senator Harry Reed will only negotiate with, quote unquote, "Conferees"-- with a clean-- with a clean CR. On the other hand, Speaker Boehner-- will not accept a clean CR, although he has put up some conferees. I don't see how the two get together. And I don't see where the shutdown ends, sir.

SEN. MITCH MCCONNELL: Well, the shutdown will end. Nobody's in favor of a government shutdown. But these are important principles that we're fighting for, for the American people. We obviously want to continue the operation of the government.

But we want to keep it within the constraints of The Budget Control Act that were passed-- two years ago, which actually have reduced government spending for two years in a row for the first time since the Korean War. This is a-- story largely untold that the-- the bipartisan agreement called The Budget Control Act, two years ago, of which the sequester is a part, has actually reduced government spending for the first time since the Korean War for two years in a row.

We-- we don't want to walk away from the spending reductions we've already promised the American people over the next two years. In addition to that, 99% of the Bush Tax Cuts are now permanent-- permanent law. Meaning we don't want to walk away from the permanent tax relief that we achieved last-- New Year's Eve. Look, none of those would be good for the country. To tax more or to spend more would not be good for our economy. We don't want to do that. And we don't think that ought to be the condition for reopening the government, or for raising the debt ceiling.

LARRY KUDLOW: All right. So what happens here? In the meeting with Mr. Obama in the meeting with President Obama-- he doesn't sound like he wants to negotiate on the continuing resolution. And he doesn't sound like he wants to negotiate on the debt bill. A lot of people, Senator, believe, within the next week or two, the two issues are going to merge. The-- shutdown is going to merge with the debt ceiling on or about October 17th, when the ceiling expired. So did the president give any sense of how he would handle that? Was there any sense, by the way, that he might, in some-- extra or unconstitutional way, just raise the debt ceiling on his own?

SEN. MITCH MCCONNELL: No, I-- I don't think he's—going to take that position. And he surely must know that the American people expect us to negotiate. We have divided government. He party doesn't control the whole government, neither does mine. When you have divided government, you obviously have to talk to each other.

And I think the President's position, at least at the moment, that there's nothing to talk about-- is-- is really unacceptable. And by the way, there was another-- train wreck hitting America just yesterday called Obamacare. And what we have said is we also should be talking about some relief for the American people for the worst law that's been passed in the last 50 years.

The president himself has already given a one-year delay to businesses. Why not all the rest of us? And so we have said that was an important issue that was bad for the economy that needs to be addressed, as well. And so far, as you know, he's very resistant, unless he does it himself-- which he did with businesses or with other allies of his-- reluctant to allow us to-- get all the American people at least a one-year delay from the implementation of this new law, which is, of course, creating havoc out across the country.

LARRY KUDLOW: So I don't really get-- Senator, I don't really understand where the compromises are going to come from. Because the president is saying, in effect, he wants a clean-- continuing resolution, he wants a clean debt bill, and he doesn't want to modify-- Obamacare, The Affordable-- Act-- at all, unless and until those two other conditions are met. I don't see where the compromise comes in. That's why I don't see where the endgame is. Can you help me on that?

SEN. MITCH MCCONNELL: Well, the-- the-- there will have to be a compromise, no matter what the president says today, because his party doesn't control the entire government. You know, the American people have frequently-- elected divided government. When they do that, they don't expect us to do nothing. They don't expect us to not talk to each other.

And what we're saying is, "Let's talk about this." In fact, the House has sent over a number of different proposals, including, believe it or not, the last one was to go to conference and have a discussion about this. Senator Democrats voted that down, too. I mean who's being unreasonable here? When you have divided government, you have to talk to each other.

And our view is it's time to talk, to eliminate the government shutdown, to find out what conditions need to be attached to raise the debt ceiling-- so the full faith in the credit of United States continues to be honored. But we also, at the same time, do something about this enormous debt that's been accumulated during the Obama years.

LARRY KUDLOW: So-- Senator, just-- I'm running out of time. I just want ask you: From this meeting today with the president, this 5:30 meeting, did you sense any change at all in any part of his posture?

SEN. MITCH MCCONNELL: Well, not yet. But there – going to have to be a change, because he can't get his way exactly the way he wants it because he doesn't control the entire government. The American people expect us to come together and figure out how to solve this problem. And sooner or later, we're going to do that.

LARRY KUDLOW: All right, many, many thanks, Senator Mitch McConnell. We appreciate your time, sir and-- all of your great information.

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