This part of the equation says merely that total national saving equals the sum of all saving done in the economy by the private sector and the government sector. A budget surplus would be treated as governmental saving and added to private saving; a budget deficit would be treated as governmental dissaving and subtracted.
Since it takes more than a year for the full effect of monetary policy to work through the economy, central banks have tended to look through the direct impact of supply disruptions on inflation. That means we don't respond by raising interest rates. This year, the inflation response was different.