What’s going on with Lloyds‘ (LSE: LLOY) shares? The share price seems to be on a bit of a downward swing at the moment. A high of 117p earlier in the year has eased back to 103p on 7 October.

One possible reason for the retreat is a few nerves around the upcoming fiddling with the government’s finances. Following Prime Minister’s Questions on 28 October, Chancellor John Healey will deliver the Autumn Budget – and Lloyds could be squarely in the crosshairs…

Likelihood?

The rumours are that a windfall tax on the banking sector is going to be introduced. The justification is that banks are going through something of a purple patch on the back of elevated interest rates – higher borrowing costs tend to widen margins. In Lloyds’ case, we can see a dividend that has doubled since 2021.

Is a windfall tax likely? The latest rumours suggest it. Apparently, Healey has warned bosses of Britain’s biggest banks the government is in a “difficult fiscal position”.

The government needs the money to keep the fiscal headroom intact. That was a key manifesto promise. Another one of the promises made prior to the 2024 election was not to touch taxes on working people like income tax or VAT.

That leaves few places to extract dough for the government coffers. The clincher might be that banks are seen as fair game in this respect. For better or worse, few voters will go into mourning because of a tax on banks.

What will the impact be? This depends largely on the nature of any tax. A one-off raid is unlikely to make too much of a dent in the share price. A big and permanent levy on banking profits could do lasting damage to the sector.

The middle ground might be reversing the Bank Surcharge cut. In effect, this would mean taxing bank profits at 33% rather than 28% – impactful, but perhaps not cataclysmic.

A buy?

Is Lloyds’ stock worth buying? It’s worth considering, in my view. Even a rough bit of tidings in the upcoming budget is likely to be offset, perhaps even entirely, by the current expectations for interest rates.

That’s because higher rates – in the 4%-5% range – are what have underpinned the recent strength in the banking sector.

The Bank of England’s target, meanwhile, is to bring them down to 2% when inflation is under control. And well, inflation isn’t under control.

Because of the Iran war leading to elevated fuel costs, rate hikes are now on the horizon. The US has already bumped up the price of borrowing by 25 basis points, and the markets are pricing in even more over the coming year.

In summary, it looks like a windfall tax could well be on the cards for Lloyds and its peers. At the same time, I don’t think it will be anything like the end of the world.

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John Fieldsend owns shares in Lloyds.