This is exactly what I thought was fuzzy =)
I couldn't find the location in the spec where this was stated.
Can you point me to the section where it states that
xsl:element does
not
generate namespace nodes unless required by its (resolved) name?

That's not the way the spec is written. It doesn't say that such namespaces
are generated, therefore they aren't. The spec says what happens when you
instantiate an instruction; it would be impossible to list all the things
that don't happen.

Michael Kay
http://www.saxonica.com/