Would it be possible to add an optional parameter to dump_mem (and family) to pass the tree through xmllint --format??  Since you are already using the libxml2 functions, it seems only natural to apply this one.  After weeks of fighting with keeping the whitespace correct in an xml document after moving, manipulating and adding elements, I found it is just easiest to start from the top and reformat then to try to play in the whitespace sandbox.  Daniel Veillard's xmllint functions are super fast and hardly hurt performance, especially when you have to show your boss the xml file after it get's torn to shreds.