The Shadow Chancellor was speaking at the "Left Field" tent on Sunday (June 25) when he made the comment during a debate titled "Is Democracy Broken?".
His comments come just days after Metropolitan Police confirmed it is considering manslaughter charges in its investigation into the deaths at Grenfell Tower.
Mr McDonnell also disputed the known death toll of the devastating fire, officially at 79.
"Is democracy working? It didn't work if you were a family living on the 20th floor of Grenfell Tower," he said.
"Those families, those individuals - 79 so far and there will be more - were murdered by political decisions that were taken over recent decades.
"The decision not to build homes and to view housing as only for financial speculation rather than for meeting a basic human need made by politicians over decades murdered those families.
"The decision to close fire stations and to cut 10,000 fire fighters and then to freeze their pay for over a decade contributed to those deaths inevitably, and they were political decisions."
At least 79 people were killed during the fire at Grenfell Tower in North Kensington on June 14.
The Chief Executive of Kensington and Chelsea Council was forced to resign as the recent renovation of the council-owned building comes under growing scrutiny.
The west Londoner went on to call for proportional representation and attacked the House of Lords, saying it was based on who someone "shagged" in the past reported somersetlive .
He also declared that public ownership of rail, water and energy was vital for the future of our economy.
Labour Party leader Jeremy Corbyn had addressed crowds of tens of thousands at the festival's main Pyramid Stage the day before.
Much of his short speech at the festival was drowned out by cheers of "Oh Jeremy Corbyn" to the tune of White Stripes' Seven National Army.
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