This is sort of a fuzzy area in the spec, so any help would be
appreciated.

I'm not sure it's so fuzzy. Can you explain why you think it is?

I believe Saxon's output in this case is correct.

Well that's a very different case, because the namespace declaration is
now required on the foo element.

The real issue is whether a namespace declaration in a stylesheet
generates a namespace node in the result tree, and in the case of
xsl:element, it does not.

Thanks again,
-Jack