By Sarah Marsh and Nicolás Misculin
LA MATANZA, Argentina (Reuters) - Catalina Benitez, a single mother of four, used to cry whenever heavy rain flooded her squalid, one-room shanty house on the outskirts of Buenos Aires, rotting her furniture and overflowing the latrine.
Now, thanks to a government housing scheme in slums, she is the proud owner of a two-floor brick house with running water, electricity and a proper sewage system.
The walls are grimy and trash still piles up on the dirt road outside where stray dogs roam, but her living conditions in the grim, densely-populated district of La Matanza west of the capital are now are a luxury in comparison to 15 years ago.
"This is a real palace for me," said the 47-year-old Benitez, crediting leftist President Cristina Fernandez for her new home and other welfare benefits that mean she wants for nothing. Unemployed, Benitez receives a grant to study to be a social worker.
Fernandez's heavy government spending has fueled inflation of about 30 percent a year and her trade and currency controls stalled growth, infuriating many middle-class Argentines and business groups.
But it has won her support among the poor. With Fernandez unable to stand for a third presidential term, those supporters are now backing her anointed candidate, Daniel Scioli, in presidential elections in October.
"He's the one Cristina chose. He will continue along this government's path of modernization," said Benitez, who lives in "Villa Palito", one of about 170 shanty towns in La Matanza, a key electoral battleground.
Fernandez's support has helped Scioli take a lead in opinion polls over his more conservative rival, Mauricio Macri, meaning investors may have to wait longer for Argentina to unravel the president's interventionist economic policies.
Social spending has spiraled upwards in 12 years under Fernandez and her predecessor and late husband Nestor Kirchner. Opponents say those policies have driven up inflation and government debt.
Salaries and pensions have been eroded by inflation and many among La Matanza's 1.8 million people want a degree of change, but beneficiaries of the government's programs fear Macri would move too far and too fast in adopting pro-business policies and prefer a more gradual approach that Scioli is promising.
In party primaries on Sunday, Scioli, a moderate within the ruling Peronist movement, led with 38 percent support. Macri had 24 percent, although that share rises to 30 percent when the votes for his alliance partners are included.
Argentine bond prices fell and the black market peso rate weakened in the past two months as Scioli defended Fernandez's policies and extended his lead in polls, but bonds rebounded this week after the primaries showed the election is likely to go to a second round, giving Macri a greater chance of victory.
Macri says he will unwind Fernandez's web of state controls on the economy and cut the fiscal deficit, perhaps by reducing subsidies, though he says it will not be done at the expense of the poor.
"No one is going to take anything away from anyone," Macri's running mate Gabriela Michetti said on the campaign trail in La Matanza.
Still, Fernandez's loyalist supporters are not convinced.
"We can only imagine how Macri lives and he can only imagine how we poor people live because he doesn't know us," said Juan Enriquez, 44, who grew up in Villa Palito and is now in charge of rebuilding slums throughout La Matanza.
"Macri works for the middle and upper classes," he said, sitting in an office decorated with photos of Kirchner and Fernandez visiting Villa Palito.
One in four Argentines live in Buenos Aires city and its outlying conurbations, so this is where presidential elections are typically won and lost.
In the primaries, Scioli won more than half the vote in La Matanza, although support for the ruling party was lower than in the last election in 2011, in part due to frustration among more affluent, white-collar workers over Fernandez's handling of the economy.
Macri could boost his chances of victory if he is able to tap into that discontent.
Walking his toddler to a new playground, salesman Martin Lobo, 38, said he has a steady job, helped in part by political stability under Fernandez, but that inflation was eroding salaries.
"The economy is not so stable anymore because of inflation," he said. "The government denies it but we see it every day at the supermarket."
Lobo said he and his wife could only dream of buying a house after inflation snuffed out the mortgage market. He now wants change but worries that Macri, with a background in business, would run the country like a company. His vote, he said, was still undecided - like one in ten Argentines nationwide.
Eating into salaries and pensions, high inflation may have even raised poverty levels in the past two years, according to the Catholic University of Argentina.
The government disputes this, saying poverty levels are lower than in Germany.
Some voters say Fernandez's welfare policies have distorted the economy.
Delia Viviana Hoga, 65, commutes two hours every day into work to top up a 3,000 pesos ($325) monthly pension that she says is not enough to make ends meet.
"In the slum they have two-story houses but I have to fight and work for every brick of my house," said Hoga, who added she would be voting for Macri.
"I see people waiting to get their subsidies with mobile telephones that are nicer than mine and I work - I've worked all my life, for 30 years - and I will have to continue working until my body gives way."
(Editing by Richard Lough and Kieran Murray)